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Are you a contractor or an employee?
Do you have control over the way a task is performed and do you work standard hours? Do you submit tax invoices for payment and do you file GST returns?
In a time when ‘sham contracting arrangements’ are on the rise, according to Minister for Trade Craig Emerson, the answers to the questions above are a crucial indicator as to whether you are an employee or an independent contractor.
Contractors – particularly in engineering and computer technology industries – are under the compliance microscope in 2012 as the Tax Office says it will use information provided by labor hire firms and auditing companies to apprehend contractors that it believes may have wrongly classified themselves as conducting a personal service business. The benefit of being classified as a contractor is qualifying for the company tax rate of 30% (or even lower if the entity is a trust) rather than personal income tax rates. It is vital you know the distinction between a contractor and employee to avoid instances of exploitation or penalties in the event of a breach of tax laws.
Under ‘sham contracting arrangements’, employers treat workers as independent contractors to avoid meeting employee entitlements such as leave entitlements, workers’ compensation insurance and superannuation guarantee obligations.
What is the difference between the two? If you are an employee, you are paid a salary. You receive leave entitlements such as sick leave, annual leave and long service leave. You’re supplied with all the tools and equipment needed to perform your job, such as a computer for instance, and you are expected to perform certain duties as agreed during work hours set out in your contract. You are recognized as part of the business. You take no commercial risks and cannot make a profit or loss from the work performed.
This table below will help you determine whether you are an independent contractor or an employee:
equipment for the job and you can delegate your duties to another person. You are free to accept or decline work as you please and you can make either a profit or a loss while employed as a contractor. In other words, the working arrangements for an independent contractor are more flexible and unpredictable than that of an employee.
There is no single criterion that can conclusively determine if you are an employee or an independent contractor, but rather a range of combined factors.
Why is it important to know which one you are? If you are an employee being incorrectly classified as an independent contractor, you are losing out. There is no withheld tax from your salary and there is no legal entitlement for leave, superannuation and workers’ compensation insurance.
As a contractor, there are also a different set of tax obligations you will have to follow. You will require an Australian business number (ABN) to avoid having tax deducted at the top marginal rate of 46.5% (including 1.5% Medicare levy) and may also need to register for goods and services tax (GST).
You have to register for GST if your GST turnover is at, or above the GST turnover threshold of $75,000 (exclusive of GST) and $150,000 (exclusive of GST) or more for non-profit organisations.
Come the end of every financial year, contractors have to take care of their own tax liabilities unlike their employee peers whose taxes are withheld under the PAYG withholding system.
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